Question

If this product line is eliminated, 60% of the fixed expenses are traceable fixed expenses, which can be eliminated and the other 40% are common fixed expenses that cannot be avoided. If management decides to eliminate this product line, the company's net income will ________.

Answer 1

Answer: decrease by $6000

Explanation:

Because 60% of the fixed expenses are traceable fixed expenses

Answer 2

Answer:

decrease by $6,000

Explanation:

sales                                   $215,000                            

variable expenses            ($125,000)

contribution margin           $90,000

fixed expenses                 ($140,000)

net loss                              ($50,000)

if this product line is eliminated, 40% of total fixed expenses will remain = 40% x $140,000 = $56,000

that means that the company's net income will change = remaining fixed costs - net results from product line = -$56,000 - (-$50,000) = -$56,000 + $50,000 = -$6,000

net income will decrease by $6,000